Deal with Japan not just a matter of trade

Bilateral “free" trade agreements are as much about diplomatic positioning as economic liberalisation and so Australia and Japan have embarked on closer defence ties under the radar of a trade deal.

Closer security ties have been the real growth area in the relationship during the long seven years of trade negotiations, and they remain the most sensitive amid the rise of China and some differences between the US and Japan over Japan’s new nationalism.

But for ambitious conservative national leaders with a strong personal appreciation of history, Monday’s agreement was a triumph for Tony Abbott and Shinzo Abe.

They have put their stamp on closer defence ties between the two one-time foes while refreshing an economic relationship that began in 1957 under Abbott’s political hero Robert Menzies and Abe’s grandfather Nobusuke Kishi.

“When I was young, there were ex-soldiers’ clubs in Australia that wouldn’t let Toyotas into their car parks because of bitter memories. Even then, statesmen in both our countries were looking forward, not backwards," Abbott told attendees at his Tokyo business lunch.

Technology sharing, joint submarine work and disaster co-operation are good for regional security, as would be reform of Japan’s pacifist constitution.

But Australia must watch how much it is signing up to the historical revisionists inside Abe’s Liberal Democratic Party who want to rewrite the past rather than move forward.

The trade deal is about moving on in a post-war relationship based on the resources trade, which Abbott has rightly described as one of the most productive in modern economic history. But both sides, especially Japan, need to move forward to accept the growing importance of services in international trade and to re-embrace the basic trade theory about lower-cost imported goods being good for economies.

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Australia has done this relatively swiftly in both the Korean and Japanese deals, cutting car and parts tariffs from 5 per cent over three and five years respectively.

But Japan has proven much more tardy on the other side of the ledger, cutting the key chilled beef tariff only from 38.5 per cent to 23.5 per cent over 15 years. This compares with Korea eliminating a 40 per cent beef tariff over 15 years.

Given Japan is a bigger market, many beef farmers may see this as a success, especially if they get access to a better deal for US farmers under any future Trans-Pacific Partnership.

But it doesn’t provide a lot of confidence in Abe’s ability to re-ignite his economy with domestic deregulation when, even though he has stronger political capital than Abbott, he cannot slice through protection for the beef industry.

This is a sector that Oriental Economist editor Richard Katz says accounts for only 0.6 per cent of gross domestic product, while the livestock industry accounts for less than 100,000 households out of 46 million.

Abe is a leader of global significance because he may well be the last Japanese prime minister with the chance to revive the world’s third-largest economy before the impact of a government debt to GDP ratio above 200 per cent hits home in a country with a shrinking population.

So the significance of Abbott’s Sunday night beef trade negotiation over dinner is whether he has pushed his fellow conservative to the limit of pro-consumer economic reform.

Australia has a lot to gain from a Japanese renaissance in trade opportunities, new inward investment and business cooperation in other parts of Asia drawing on the trust developed between Australian and Japanese firms since 1957.

As Abbott told his lunch audience: “We trade with people whose products we respect and whose word we can rely on. It’s hardly surprising that Australia’s friendship with Japan has grown as our trade has increased; and that this friendship has broadened from trade into an increasingly close partnership in a whole range of areas, from science to defence."

But this renaissance depends on the strength of Abe’s commitment to economic reform beyond easy stimulus measures. And the somewhat open-ended defence co-operation Australia is signing on to will also depend on Japan’s underlying economic strength.